Beware of investments offering high returns. Only invest if you’re prepared, and can afford, to lose all your money. Find out what you need to know before investing.
We have seen too many examples of consumers searching online for high-return savings and investments, investing in high risk investments and then losing all their money. If high returns are being promised or even suggested, then this means there are higher risks associated with the investment.
While product names and descriptions change frequently, examples of high risk investments might include:
- high-return bonds or mini-bonds, which are often advertised as eligible to be included in Individual Savings Accounts (ISAs)
- unregulated collective investment schemes (UCIS)
- some structured products
- contracts for difference
- land banking
- cryptoassets e.g. Bitcoin
- foreign exchange products
- binary options
- peer to peer lending
- investment based crowdfunding
1. Am I comfortable with the level of risk?
All investments carry some element of risk but the higher the return, the higher the risk. So, if you are considering an investment that offers high returns, ask yourself if you can afford to lose all the money you invest.
It may not always be clear what level of investment returns might be considered ‘high’. A good place to start in comparing possible rates of return is to compare your investment opportunity with the best cash savings rate you can find. You will see that the return on these products is much lower, and by default, the risk is significantly less.
As a rule of thumb, consider limiting yourself to not investing more than 10% of your net wealth in investments where there is a real risk of losing a significant part, or all, of your investment. Your net wealth is your assets minus any debt you owe.
No investment is without risk. If you’re offered a high rate of return it means your investment carries higher risk. You should think very carefully before investing, and not invest any money you can’t afford to lose in full.
2. Do I fully understand the investment being offered to me?
Make sure you take steps to fully understand what you are investing in and what different types of risk are involved. For example, an important question to ask is how ‘liquid’ is the investment? Can you get your money out when you need to? Is it easy to sell the investment on if you need to? Would people be willing to buy the investment from you? If you wanted to cash out, would you need to get the investment provider’s agreement?
High risk investments are often complicated and may have complex structures that are hard to understand. For example, with mini bonds, your investment may be lent to, or invested in, a different company from the company that issued the bond. Your investment may also be subject to various fees and charges taken by multiple parties. This may affect the ability of the investment to deliver advertised high rates of return.
It’s worth noting that where investments are eligible for ISA or pensions savings wrappers, this does not mean that they are lower risk or that there are additional protections for investors. The FCA does not ‘approve’ individual investments even if they can be invested through an ISA or pension saving wrapper.
High risk investments are more suited to people with experience in financial markets. If you cannot afford to lose your money, or consider yourself to be a less experienced investor, or if you are unfamiliar with the type of investment offered, it’s wise to seek independent financial advice before deciding to invest.
3. Am I protected if things go wrong?
We have seen examples where consumers have mistakenly assumed or been led to believe they had access to compensation if they lost money on their investment. It is important that you look in to which protections, if any, might be available to you before you invest.
In the UK, any firm carrying out a regulated financial services activity must be authorised by us. You can check whether a firm is authorised on the Financial Services Register. If you use the services of a firm that is not authorised you generally will not have access to the FSCS or the Ombudsman.
The Financial Services Compensation Scheme (FSCS) may, in some circumstances, provide protection if an authorised firm which you have been dealing with has done something wrong and goes out of business. The Financial Ombudsman Service (the Ombudsman) settles complaints about authorised financial services firms.
Please note that your right to access the FSCS and the Ombudsman does not apply in all circumstances, and using the services of an authorised firm is not a guarantee of protection.
Even if you can access the FSCS or the Ombudsman you should still be aware that you will not receive compensation just because your investments perform badly.
Some authorised firms offer both regulated and unregulated services to consumers. For example, a firm could be authorised by us to provide a regulated activity such as arranging for you to buy or sell shares. However, they may not need authorisation to provide an unregulated activity such as arranging for you to invest in gold.
1. Whether the firm you’re dealing with is authorised, and,
2. Whether the service that the firm provides to you involves regulated activity that is covered.
Please be aware that just because a firm says you are covered, does not mean you will necessarily be protected if things go wrong. The Ombudsman and the FSCS are subject to different rules which determine when they can and can’t award compensation – so claims are decided on a case by case basis.
4. Are my investments regulated?
There are activities that we don’t regulate and so you will not have access to the FSCS and the Ombudsman. These include, activities involving direct investments in:
- commodities e.g. gold, bamboo, diamonds, graphene
- hotels or hotel rooms
- UK or international forestry
- land for development
- overseas agriculture
- parking spaces
- storage units
- student accommodation
- sustainable energy
5. Should I get financial advice?
You should consider getting financial advice if you need help understanding the nature of the investment and the risks involved. An adviser will be able to help you create a plan to meet your goals and recommend the right balance of investments for your risk appetite. If you do opt for an adviser, make sure they are regulated by the FCA. Here are some tips about how to find one and some questions to ask.
Find out more
Be wary of investment scams
Promises of high returns can often be a sign of a scam. This is particularly the case if the risks are being minimised or hidden in the small print. You should be especially wary if you’ve been contacted out of the blue and pressured to invest quickly. Scammers usually cold-call but contact can also come by email, post, word of mouth or at a seminar or exhibition. Scams are often advertised online too. The safest thing to do is reject all unexpected offers.
The risk of being scammed can still be high even if you have approached the firm yourself following web searches or via an advert. Visit our ScamSmart pages to learn more about the warning signs of an investment scam and how to protect yourself.